Inside The Movie Premiere Of 'The Ghost Exchange' — A Warning About High Frequency Trading To Investors Around The World

Julia La Roche for Business Insider
High frequency trading is one of the most polarizing issues on the Street.

It's also so complex it's hard to talk about in normal conversation.

To broaden the investing world's understanding of the topic, a new film called "The Ghost Exchange" is examining the impact of high frequency and algorithmic trading on U.S. capital markets, the lack or regulation on HFT and the systemic risks it poses.

It's directed by Camilla Sullivan and the co-produced by Rob Lyall.

To get the full story, the producers interviewed a number of market practitioners from all aspects of the market — traders, academics and regulators.

"The Ghost Exchange" focuses on three of the most recent market events, which have called into question the integrity of these markets— the "Flash Crash" of May 2010, the Facebook IPO snafu and Knight Capital losing over $400 million from a trading error.

What's really interesting is the producers of the film said they got to work on the idea in January 2012 after a conversation about the "Flash Crash."

They were actually planning to interview Knight CEO Tom Joyce for the film before his firm's trading error.

"As we were already on the road to Jersey City, we got a call. Seems there'd been a slight software error - to the tune of $440M in trading losses. Tom had to cancel our interview. However, turning lemons into lemonade we decided to see whom we could talk to about what just happened - an example of trading technology gone haywire. Well that's what the movie is about isn't it?!," they said in a release.

The real question the film raises, though, is how all these issues impact outside investors. It's important to know whether or not HFT ultimately takes away money and opportunity from our markets as people lose confidence in the entire system.

We went to an advanced screening at the Tribeca Grand Hotel this month and have included the highlights in the slides that follow.

The venue for the film was in the basement of the Tribeca Grand Hotel.

Julia La Roche for Business Insider

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The cinema.

Julia La Roche for Business Insider

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The movie poster.

Julia La Roche for Business Insider

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Of course, you have to give out popcorn at a premiere.

Julia La Roche for Business Insider

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Before the show started, we asked the movie's participants at the premiere if they were concerned about these systemic risks in the market or if they thought they were more like growing pains from technology. Let's meet them and see what they have to say...

BI: Are you concerned about the systemic risks of the market or do you think these are a byproduct of growing pains from technology?

Eric Hunsander: "No, these aren't growing pains. These are people who focus all of their development dollars on their profitability. And if there's a problem, they'll just ask the exchange to cancel, make it better."

BI: "So what do you think should be done then?"

EH: "One step would be for the exchanges to never cancel trades. If the algorithm decides to sell that stock at a penny, well there's no incentive for them to fix it unless they get stuck with it."

BI: Are you concerned about the systemic risks of the market or do you think these are a byproduct of growing pains from technology?

Joe Saluzzi: "I think there's always, there's certainly embedded risks in there. The flash crash was the ultimate embedded risk. The Knight algorithm shows more. Can it happen again? Yes. We don't know what the next one will be. When will it be, but it will. What's been changed? What's been fixed? Well, nothing. A couple of bandaids here and there, but there's certainly risks embedded in the sense there are no real market makers. There's no real stability anymore. It's pretty much I can walk away at anytime I want if I was a market maker."

Sal Arnuk: "I think it's more than growing pains and I am concerned. I'm not concerned as in saying I'm going to make a prediction that we're going to crash, but no one ever worries about this stuff when things are going well. I feel the Flash Crash, the botched IPOs, the mini flash crashes that happen on a daily basis...all these things are warning signs. And, if we're not going to heed them now when times are good and the market's at an all-time high and everyone is feeling good I think we're doing investors a disservice."

BI: So what needs to be done then?

JS: "We've got a couple of recommendations. We think it's structural. We don't think you can say come in and ban HFT. That's not what we're saying at all. We're free market guys. We're capitalists. But, there are certain things the SEC can do to limit some of the exposure. We think the biggest thing is get rid of the maker-taker model, which is the rebate system or get rid of all payment floor-to-floor. That's just one. You get rid of some of the incentives that created the high frequency industry, you start erode it a bit. And maybe give the opportunity for a real market maker to come back in and create a market based on a real spread."

SA: "You can legislate around the edges. We felt and a lot of these terms are archaic... Oh you you can institute a minimum life on orders you can put in a speed limit...these are addressing symptoms. The heart of the game is the for-profit exchanges relying on a model called maker-taker and the maker-taker rebate system is the one that incentivizes and has created the arms race in speed, the arms race in algos. The maker-taker model incorrectly quoted for resulted in Knight's August 1st fiasco. So, you take away this distorted model and I think you're about 90 percent into cleaning the market."

BI: Are you concerned about the systemic risks of the market or do you think these are a byproduct of growing pains from technology?

William O'Brien: "I would say any business, whether it's an individual company like DirectEdge or industry, needs to be managing risk on an enterprise-wide basis. Every business is very reliant on technology in this day and age. So, you have to manage that. I wouldn't say recognizing the need to manage it is the same as being worried about it. We had a lot of time and energy making sure we manage those risks effectively and it's simply not just make sure the system doesn't go down because that's going to happen once in a while like it does on Amazon.com or anything. But if you have procedures and people in place to manage those incidents correctly that's really the difference between Facebook. That's wasn't what happened. It's what happened after. It's something you really do need to be focused on because I think our stock markets are really no different than any other American industry in that regard. You have to manage the risks on an enterprise-wide basis so say with the technologies that you use. But as long as you have those mechanisms in place I think you're on sound footing so I wouldn't say that I'm worried about it."

BI: "Your thoughts on the film?"

WO: "It's good people are trying to explore this issue in a balanced way. There's been a real echo chamber of criticism and I think to some degree that has discouraged people from speaking out about what's really working in our markets and a lot of the hard work that's been done to make it even better. So I really commend Camilla for trying to take a balanced approach to it.

BI: Are you concerned about the systemic risks of the market or do you think these are a byproduct of growing pains from technology?

David Weild IV: "I'm absolutely concerned about the systemic risks, but not just in the United States, but globally because we've homogenized stock markets and what happens is they're all interconnected. We don't have firewalls. There's also the issue of algorithms and they all feed into the same market and if something goes awry you can have lots of the actions from that and you don't know where it's going to take you. I think the SEC is starting to get its arms around that in this country. Basically, if you start to look at the European accords if they're trying to homogenize markets across Europe. One of the advantages of the old days was that these markets were walled off from each other, you know.

BI: What do you think should be done then?

DW: "They have to have lots of brakes across, you know, asset classes. Regulators have to have ways to essentially stop things from rippling through markets very quickly. They have to make sure that everything is tested before it integrates into the market. We're talking about 'fail safe' or what they call 'kill switches' in the U.S. markets. I think these would all be steps in the right direction. But, I also think cutting down the number of price points helps sort of helps. I mean cutting down the complexity. I think they need to figure out a system how to make stock markets a little less complicated because what happens is the more more complicated they are the more that even market professionals don't understand them and that starts to erode investor confidence. So there's a point at which the people who cited the fact that stock markets are supposed to support economic growth and you know they're not doing that right now and they need to do that."

BI: Are you concerned about the systemic risks of the market or do you think these are a byproduct of growing pains from technology?

Seth Merrin: "There's really systemic risk in the market today. In fact, what Knight showed us was that a simple algorithm can now be a weapon of mass destruction. So I think that we have to harness the technology and the destructive power and use it for good."

BI: "So what's the solution here?"

SM: "The solution has to be, to be more proactive. The regulators have to be more proactive in understanding where the market's going from a technology perspective and also from a market participant perspective. And be able to, once you can focus on anything you can address and assess what the risks are. You cannot be looking at it in hindsight. You have to be addressing at it ahead of time and that's a big change we need the regulators to do.

BI: "Thoughts on the film?"

SM: "I'm really happy that this whole issue, our markets are so important to capitalism, and as we have seen some of these technology issues can make investors worry. They don't understand it, they think the markets are rigged. So we have to make the market safe for investors and bring investor confidence back. A film like this is actually really, really good. It exposes the underbelly of what's happening in the markets so people can take notice and address it.

"Really what started out as an interest turned into an idea and then a mission and then a passion. We couldn't not make the film. We're concerned investors as much as citizens of the country who want to see things taken care of. The whole point of this, and hopefully you take this away, I'm not a hundred percent sure what the answer is, but discussion is definitely a part of it and not letting decisions be made for us, but making them proactively and being aware about how market structure changes will impact not just today, but really the future of the U.S. As a naturalized immigrant, I believe in the whole American dream, and I'd like to see it continue."